Institutional Perspectives - Wilmington Trust...Institutional Perspectives July • August 2020...

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Monthly investment analysis and insights from Wilmington Trust Investment Advisors

Institutional Perspectives

October 2020

Emotions have no place in investing. The best investors are

often the most objective and have ice in their veins. For many

on both sides of the aisle, however, the president’s positive

COVID-19 result adds further anxiety and ambiguity to a

historically tense moment. With the ongoing pandemic, a

weakening economic recovery, and of course the upcoming

elections, emotions are understandably running high.

Our reaction is straightforward: Filter out the emotion by

sticking with our process. We analyze the economic data, build

our economic and asset class forecasts, speak with companies

and investment managers, and debate the path forward as a team. With this

foundational approach and a deep appreciation for the precariousness expected

over the next few months, we are maintaining a slightly cautious posture in

portfolios. This may be a time to batten down the hatches and “quarantine”

portfolios, in a manner of speaking. The storm will pass and we believe we will be

thankful for having ridden it out with our portfolios largely locked onto our long-

term targets.

Running out of steam

The month of September was the first indication that the market’s euphoria may

be tempering. We witnessed a modest but healthy pullback in U.S. large-cap

equities of -9.6% peak to trough, which began as a shunning of high-flying tech

stocks but morphed into skepticism about the trajectory of economic growth. Yet,

the S&P 500 still ended the third quarter up 8.5%. We are not discouraged by some

of the air being let out of the balloon, but we continue to observe an economy

that is suffering more than the public equity market would have you believe. We

Tony Roth Chief Investment Officer

In this issue:Nothing to Fear but 1 Fear ItselfTony Roth

Harnessing the Power 5 of DiversificationEvan Kurinsky

Asset Class Overview: 11 Taxable Fixed IncomeRandy Vogel, CFA

Investment Positioning 12

Disclosures 13

Nothing to Fear but Fear Itself o n t h e r e c o r d

Continued


Continued

remain cautious on the short-term path for risk assets (stocks).

Since March, the market has been supported primarily by three pillars: monetary

stimulus, a bounce in the labor market, and fiscal stimulus. Monetary

accommodation of global central banks remains firmly in place, and we continue to

believe the Federal Reserve will support financial conditions by whatever means

necessary. Still, there is a high bar for the Fed to unveil additional stimulus and

further reflate asset prices at this juncture.

The other two pillars appear to be on more fragile footing. The U.S. has recouped

approximately half of the 22 million jobs originally lost amid the economic lockdown.

However, the September labor report reveals major challenges in the jobs recovery.

Most important, the number of permanent job losses continues to mount at a rate

without precedent in modern recessions. In addition, the pace of improvement in

small business hiring has slowed dramatically, and bankruptcies are ticking up as

businesses are forced to permanently shutter their doors. Indicators of small

business employment trends (those with fewer than 50 workers) paint a picture that

is still bleaker than the depths of the global financial crisis (Figure 1). And large

companies like Disney, Allstate, and United Airlines have announced significant

numbers of layoffs in recent days. For all the jobs-market strength we saw over the

summer, we are concerned that we are now seeing a leveling off in private payrolls

far below pre-COVID levels.

Unfortunately, this plateauing at disappointing levels is occurring at a time when

additional U.S. fiscal stimulus is more elusive than ever. Since March, Congress has

provided fiscal support amounting to approximately 10% of GDP. This has without a

Figure 1

Small business hiring trends still incredibly weak Paychex/IHS Small Business Jobs Index

Over the next few months,

we are maintaining a slightly

cautious posture in portfolios.

We believe this is a time to

batten down the hatches and

“quarantine” portfolios.

Data as of September 30, 2020.

Sources: Paychex, IHS Markit.

94

95

96

97

98

99

100

101

102

2008 2010 2012 2014 2016 2018 2020

Employmenttrend improving

Employmenttrend worsening

The Paychex/IHS Small Business Jobs Index provides insight into the small business employment trends driving the U.S. economy. Using aggregated payroll data from businesses with fewer than 50 workers, the index offers a monthly, up-to-date measure of change in small business employment. Rising index levels indicate a strengthening trend and a move lower indicates a weakening trend.


doubt contributed to the rapid “V-shaped” recovery of retail sales (Figure 2) and a

spike in the savings rate, though the savings rate is skewed toward higher income

cohorts and not as representative of lower-income consumers. With so many

individuals still unemployed and many businesses struggling with ongoing

pandemic-related restrictions, a drying up of additional unemployment benefits and

other fiscal transfers could lead to a big disappointment in consumption for the

fourth quarter. Now one month before the election, it appears that desperate efforts

to find a middle ground on fresh stimulus seem to have failed.

Cautious optimism

As hesitant as we are about some crumbling of the infrastructure that appears to

have propped up the equity markets since March, there are some reasons for

optimism that the economic recovery can continue albeit at a slower pace.

Consumer confidence is rebounding. Purchasing manager indices (PMIs) are

indicating expansion in both manufacturing and services in many parts of the world,

with inventory building supporting goods-producing sectors. Even small business

capital expenditure plans have rebounded to the average observed between 2013

and 2019 (Figure 3).

We are seeing improvement in some areas of the world outside of the U.S., but much

work remains. Chinese activity and credit data are rebounding. European economic

data have also been improving, but Germany is officially back in deflation for the

first time since 2016, and the U.K. markets are forecasting that the Bank of England

will push policy rates into negative territory for the first time ever.

Importantly, we note that the second-wave health impact of the virus appears to be

less deadly than the first wave. Western Europe is reporting new weekly confirmed

cases in excess of its last peak in April, yet that is occurring with approximately

seven million tests per week, a very low death rate, and a nearly 85% survival rate for

Continued

August 2020

+2.6%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

V-shaped recovery

Data as of August 31, 2020.

Source: U.S Census Bureau

Coming soon: our 2021

Capital Markets Forecast, which will be introduced in

stages, starting next month,

and delivered in a fully

digital, animated format,

along with an exciting series

of webinars and videos.

Stay tuned for more details.

Figure 2

Retail sales have staged a full recoveryU.S. retail sales, year over year % change


those hospitalized.1 If the U.S. is able to replicate some of these successes, it would

reduce a key risk heading into the winter flu season.

Positioning amid unpredictability

With unpredictability boiling at a level almost as high as emotions, we encourage

you to resist the urge to make drastic changes in your portfolios. (Read our “In

Focus” article by Investment Strategy Associate Evan Kurinsky, where he digs

deeper into the potentially steep price of fear.) We maintain a slightly defensive

positioning, with an underweight to equities, an overweight to high-quality fixed

income and hedge funds, and a modest allocation to gold. Diversification is key

across asset classes, regions, and factors. The urge to hold elevated levels of cash

heading into the election is understandable, but we would advise staying invested.

Ride through any potential periods of volatility surrounding the election and focus

more on the weak but improving economic picture. Equities can overshoot or

undershoot in the short term, but they are always looking ahead. Similarly, we keep

our eyes on the horizon to prudently manage portfolios for the long term.

And speaking of the long term, our 2021 Capital Markets Forecast will be introduced

in stages, beginning in the middle of November. The content will be delivered in a

fully digital, animated format, along with an exciting series of webinars and videos.

Stay tuned for more details.

Until next month,

We witnessed a modest

but healthy pullback in

U.S. large-cap equities of

–9.6% peak to trough,

which began as a shunning

of high-flying tech stocks

but morphed into

skepticism about the

trajectory of economic

growth.


Source: National Federation of Independent Business.

Shows percent of small businesses surveyed planning new capital expenditures in the next three to six months.

Figure 3

Rebound in small business capex plans Percent of small businesses planning capital expenditures in next three to six months

15%

20%

25%

30%

35%

2013 2014 2015 2016 2017 2018 2019 2020

Index 2013–2019 average

1 Sources: The Economist, ECDC, ISARIC, Johns Hopkins CSSE, WHO.


i n f o c u s

Diversification is a key pillar of our investment process at Wilmington Trust.

In 2020, we have been reminded not only of its benefits, but also the challenges

investors must endure in maintaining discipline and sticking to a long-term plan.

Staying committed to a balanced allocation isn’t always easy and the merits can

sometimes be tough to grasp on a short-term basis. However, it is important to

understand that diversification can be best viewed through a long-term lens.

Below we will review how diversification works, and why it remains a powerful

tool for potential long-term investment success.

How does diversification work?

Diversification involves holding a variety of asset classes in portfolios that behave

differently under various market conditions. A well-diversified portfolio goes a

step further—providing balanced exposure across geographic regions and economic

sectors within equities and credit, and a mix of nontraditional assets, such as

commodities and real estate. Since some segments are uncorrelated or even

negatively correlated with counterparts, when one area suffers, others typically

decline by less or even increase. Upside from the winners often neutralizes downside

from losers to some degree, which in turn reduces volatility and drawdown on a

portfolio level. The icing on the cake is that diversification helps to reduce portfolio

risk without necessarily sacrificing returns.

Preparing for the inevitable uncertainty of markets

Why is diversification relevant? Economic conditions, investor sentiment, monetary

policy, and the political and regulatory backdrop are constantly shifting over time,

during which asset classes will often respond differently to changes in various

economic drivers, e.g., interest rates, inflation expectations, the pace of economic

growth. One of the most valuable benefits of diversification stems from uncertainty,

which is an unavoidable element of investing. Markets are often influenced by

unanticipated events, leading different segments to move in and out of favor in ways

that we didn’t expect. Figure 1 illustrates how market leadership tends to shift, with

each year producing a distinct mix of leaders and laggards, and how difficult it can

be to predict which asset class will come out on top. While the annual distribution of

returns across segments is sporadic, the one constant is that the diversified portfolio

remains in the middle of the pack. With a balanced allocation across both sides of

the spectrum, diversified portfolios are optimally positioned to weather unexpected

events, capturing upside from the top performers while limiting downside from

those that lag.

ContinuedContinued

Evan KurinskyInvestment Strategy Associate

Harnessing the Power of Diversification

At a glance:• Diversification is a key pillar of our

investment process at Wilmington Trust

• One of the most valuable benefits of diversification stems from uncertainty, which is an unavoidable element of investing

• When it comes to diversification, playing better defense can sometimes lead to a more effective offense

• Introducing a combination of uncorrelated assets and minimizing potential drawdown can limit the deleterious effect of volatility, enabling portfolios to produce higher returns per unit of risk relative to individual asset classes


Leadership changes can also be observed over longer-term periods. For example,

consider the past two decades (Figure 2). While 2010–2020 has inarguably been

led by U.S. large-cap and growth stocks, the prior period revealed a completely

different picture, with international and U.S. small-cap equities exerting dominance

and value besting growth. As shown in Figure 3, we can see a comparable

bifurcation across S&P 500 sectors. While the past 10 years have been prosperous

for technology and dismal for energy, the inverse was true in the decade prior—

when energy tripled in value and technology stocks failed to break even.

Continued

Figure 2

Major equity indices annualized returns over past two decades

Figure 1

Asset class annual returns (sorted top to bottom by highest to lowest returns)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

26% 55.9% 30.6% 34% 35.6% 39.5% 5.3% 78.6% 26.9% 13.6% 24.2% 38.9% 13.7% 5.7% 21.4% 37.3% 0.1% 36.4% 23.6%

16.6% 47.3% 25.6% 21.4% 32.2% 16.3% -2.4% 37.3% 18.9% 7.9% 18.3% 33.5% 13.5% 1.4% 17.4% 30.3% -1.3% 31.5% 9%

10.3% 38.6% 20.3% 13.6% 26.4% 11.9% -25.8% 31.8% 17.2% 2.7% 17.6% 32.6% 13.1% 0.6% 12% 25.1% -1.6% 26.6% 7%

-2.4% 33.8% 18.4% 10.2% 22.3% 11.7% -33.8% 30.9% 16.9% 2.2% 17.4% 32.4% 11.3% -0.9% 11.8% 21.9% -4.4% 25.6% 1.6%

-6.2% 30.1% 16.5% 7.1% 18.4% 11.2% -35.7% 27.2% 16.8% 0.4% 16.4% 22.8% 6% -1.5% 11.2% 15.3% -6.4% 22.1% -0.6%

-9.5% 29.8% 11.5% 6.3% 15.8% 7% -36.9% 26.5% 15.6% -0.8% 16.1% 16.9% 5.9% -1.9% 7.8% 14.7% -8.3% 20.5% -1.6%

-15.6% 28.7% 10.9% 5.3% 14.2% 6.9% -37% 22.4% 15.1% -4.2% 15.3% 2.3% 4.9% -2.6% 7.1% 13.7% -9.8% 18.5% -7.3%

-16% 24.7% 9.2% 5% 9.1% 5.5% -38.5% 19.7% 12.3% -9.1% 11.8% 2.1% 3.7% -3.9% 4.7% 9% -11.1% 18.3% -11.6%

-20.5% 24% 8.5% 4.6% 4.4% -0.2% -43.4% 19% 7.8% -12.2% 7% 2.7% 2.2% -4.5% 2.7% 3.6% -11.3% 8.8% -12.1%

-22.2% 8.5% 6.4% 2.9% 2.1% -1.6% -50% 11.5% 6.6% -13.4% 4.3%

-8.7% -5% -15% 1.6% 3.1% -13.8% 8.5% -12.2%

-27.9% 4.2% 4.4% 2.5% 0.5% -10.2% -53.4% 6% 6.4% -18.5% -1.1% -9.6% -17.1% -24.7% 1.1% 1.8% -14.6% 7.7% -21.4%

U.S. ILBDiversified PortfolioRussell 2000 EAFE MSCI EMS&P Dev Property

Russell 1000 GrowthU.S. IG taxable S&P 500 Commodities Russell 1000 Value

-5% 0% 5% 10% 15% 20%

2010–present2000–2010

Russell 1000 Growth

S&P 500

Russell 2000

Russell 1000 Value

Emerging markets

EAFE


Sources: Bloomberg, Macrobond.

Indices are not available for direct investment. Past performance cannot guarantee future results.

Data as of September 30, 2020. Sources: Macrobond, Bloomberg, WTIA.

Diversified portfolio composed of 35% U.S. large-cap stocks (S&P 500), 10% U.S. small-cap stocks (Russell 2000), 20% international stocks (MSCI ACWI ex-U.S.), 30% U.S. investment-grade taxable bonds (Bloomberg Barclays U.S. Aggregate Bond Index), 1.5% U.S. inflation-linked bonds (Bloomberg Barclays U.S. Government Inflation-Linked Bond Index), 2% global real estate (S&P Developed Property Index), and 1.5% commodities (Bloomberg Commodity Index). Shows total returns in U.S. dollars.


Clearly, the cost of holding a concentrated position in the wrong asset class or the

wrong sector can be significant long term. Consider that investors who held only

energy stocks for the last 10 years, assuming they would continue to excel, would

have ended up with a –30% loss versus a 280% gain had they invested in a broad

equity index instead. By carrying exposure to all sectors, we may forego some

upside relative to the top-performing sector or asset class and we can’t eliminate

declines altogether. However, we can capture highly favorable odds of a positive

outcome. As famed investor Ben Graham put it, “Diversification doesn’t just

minimize your chance of being wrong. It also maximizes your chances of being right.”

Reduced volatility allows for greater compounding of wealth

When it comes to diversification, playing better defense can sometimes lead to a

more effective offense. Reduced volatility is a well-documented benefit of staying

diversified, but less telegraphed is how minimizing drawdown can allow for greater

compounding of wealth over the long term. Avoiding large drawdowns is important

because the further portfolio values fall, the more they must climb to get back to

the breakeven point. If a portfolio loses a third of its value, it will need to rise by

roughly 50% to get back to square one. The math works further out of an investors’

favor for larger declines. A portfolio that declines 50% would require a 100% rise to

get back to the starting point. Due to the lower performance drain from large

drawdowns, a less volatile portfolio can generate a higher ending value than a more

volatile alternative, despite generating the same average annual return.

Continued

Figure 3

S&P 500 sector annualized returns over past two decades

The cost of holding a

concentrated position in

the wrong asset class or the

wrong sector can be

significant long term.

-10% -5% 0% 5% 10% 15% 20%

Technology

Discretionary

Health care

Industrials

Real estate

Consumer staples

Utilities

Communication services

Financials

Materials

Energy

2010–present2000–2010


Sources: Bloomberg, Macrobond.

Past performance cannot guarantee future results.


For example, consider two $10,000 portfolios—a volatile version that gains 40% the

first year but then declines by 20% in the second year, and a less volatile counterpart

that gains 25% in the first year and declines by 5% in the second. Both portfolios

returned 10% on average over two years, but the more volatile of the two is worth

$11,200 at the end of the period, recording a 5.8% compounded annual return, while

the less volatile is worth $11,875, achieving a superior 9% compounded annual

return—a net $675 benefit, simply by lowering volatility. As you can see in Figure 4,

which shows the same scenario repeated five times over a decade, the negative

impact of large declines compounds over time, weighing on performance over the

long haul.

Maximizing return for a given level of risk

It is important to distinguish that the goal of diversification is not to achieve the

highest return, but to maximize return for a given level of risk. By introducing a

combination of uncorrelated assets and minimizing potential drawdown, we limit the

deleterious effect of volatility, enabling portfolios to produce higher returns per unit

of risk relative to individual asset classes. To provide some real-world context,

consider a diversified portfolio invested 35% in U.S. large-cap stocks, 10% in small-

cap stocks, 20% in international stocks, 30% in U.S. taxable bonds, and 5% in

diversified real assets (commodities, TIPS, real estate) rebalanced annually. Figure 5

shows the annualized nominal return plotted against the standard deviation (a proxy

for risk that shows variation around the average return) for the diversified portfolio

and its underlying components from 1990 through the end of 2019.

Continued

Avoiding large drawdowns

is important because the

further portfolio values fall,

the more they must climb to

get back to the breakeven

point.

Figure 4

Value of $10,000 invested in volatile and less volatile portfolio

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Volatile Less volatile

10% average annual return

5.8%compounded annual return

10% average annual return

8.1%compounded annual return

Source: WTIA.

This is a hypothetical example showing two portfolios over 10 years, both starting at $10,000 value in Year 0.


Each asset class presents a tradeoff—U.S. equities generated the greatest returns

over the period, but also suffered relatively high volatility. On the other hand, bonds

experienced the least volatility, but also had the lowest returns. The diversified

portfolio provided the best of both worlds, capturing a good portion of upside from

the highest returning assets and doing so with far less risk. It is important to note

that the results of this exercise will vary depending on the period examined. Also,

despite international stocks, commodities and real estate carrying higher risk and

lower return, they are by no means superfluous. With unique sensitivities to certain

macro factors—commodities and real estate have a positive relationship with

inflation, for example—and low correlations with other assets in the portfolio, their

inclusion contributes to lower volatility relative to a stock/bond portfolio without

them, despite exhibiting higher variability on their own.

Continued

International stocks

Commodities

Diversified portfolio

U.S. large-cap stocks

Global real estateU.S. inflation-linked

bondsU.S. investment- grade taxable bonds

U.S. small-cap stocks

70/30 stock/bond (No real assets or int’l stocks)

0%

2%

4%

6%

8%

10%

12%

0% 5% 10% 15% 20% 25% 30%

Retu

rn: A

nnua

lized

ret

urn

1990

–201

9

Risk: Standard deviation of annual returns

High returnLow risk

High returnHigh risk

Low returnHigh risk

Low returnLow risk

Data as of December 31, 2019.

Sources: Macrobond, Bloomberg, WTIA.

Shows annualized total return on y-axis and standard deviation of annual returns on x-axis. Diversified portfolio composed of 35% U.S. large-cap stocks (S&P 500), 10% U.S. small-cap stocks (Russell 2000), 20% international stocks (MSCI ACWI ex-U.S.), 30% U.S. investment-grade taxable bonds (Bloomberg Barclays U.S. Aggregate Bond Index), 1.5% U.S. inflation-linked bonds (Bloomberg Barclays U.S. Government Inflation-Linked Bond Index), 2% global real estate (S&P Developed Property Index), and 1.5% commodities (Bloomberg Commodity Index). A 70/30 solely stock/bond portfolio mix is composed of 50% U.S. large cap, 1% U.S. small cap, and 30% U.S. investment-grade taxable bonds.

Indices are not available for direct investment. Past performance cannot guarantee future results.

Figure 5

Risk (standard deviation) vs. annualized return of diversified portfolio and major asset classes (1990–2019)

Diversification is not to

achieve the highest return,

but to maximize return for a

given level of risk.


Keeping our emotions in check

The risk reduction generated by combining a portfolio of risk assets is an idea that

was refined by Nobel Prize-winning economist Harry Markowitz, in laying the

groundwork for what is known as Modern Portfolio Theory—one of the foundations

for portfolio construction principles today. Markowitz once said that “diversification

is the only free lunch” in investing, but it can certainly have an emotional cost in the

short term. In fact, emotional decision making is one of diversification’s biggest

threats and can undermine long-term investment success. Our innate emotions and

biases often lead us to focus on short-term gains and losses, feeding the temptation

to buy and sell at inopportune times. However, diversification only works as intended

if we stick to it. For this reason, investors need a long-term plan, providing an

optimal asset allocation specific to their objectives, constraints, and risk tolerance. It

is important for investors to understand that successful investing is about patience,

discipline, and consistency, and when paired with a long-term plan and regular

rebalancing, the benefits of diversification can be worth the short-term challenges.

It’s been said that

diversification is the only

free lunch in investing,

but it can certainly have

an emotional cost in the

short term.

Investing involves risks and you may incur a profit or a loss. Diversification cannot guarantee a profit or protect against a loss. There is no assurance that any investment strategy will be successful.


What we are seeing now

During a dismal first quarter, investment-grade credit returned -3.14% reflecting the economic damage caused by the onset of the global pandemic. However, since the first quarter, corporate bond returns have rebounded sharply and year-to-date total returns for the sector are now a positive 6.35%. These strong returns are consistent with our comments in the April edition of Capital Perspectives. At that time, we believed compelling valuations and ongoing central bank support would entice investors back into the asset class driving valuations higher.

Money continues to flow into investment-grade credit since a record $173 billion in outflows in March. Since that time, flows have been positive every month. Year-to-date, almost $200 billion has moved into the asset class. Supply has followed demand as companies take advantage of favorable market conditions to raise debt, primarily used to build liquidity. Through September, investment-grade credit supply has totaled approximately $1.6 trillion, up 70% from last year and a new record for issuance.

What’s changing

Concerns over a second COVID-19 wave, the inability to pass a fiscal stimulus package, and the pending presidential election have increased risk aversion. Rising infection rates have raised concerns that economic activity will slow during the fourth quarter. In addition, the inability of Congress to pass another round of fiscal stimulus has increased concerns over the pace of consumer spending. As a result, risk premiums have moved modestly wider as the market digests the above-mentioned risks. At the end of September, the option-adjusted spread of the Bloomberg Barclays Credit Index was 128 basis points, approximately 10 basis points wider for the month.

What we expect

We expect political uncertainty to remain high in the near term. The course of the virus and its impact on the economy will also remain a risk in the near term. However, as highlighted in our September addition of Capital Perspectives, we remain optimistic that we will see more than one vaccine approved by the Federal Drug Administration for distribution by the end of 2020. In addition, we believe that a fiscal package in the ballpark of $1.5 trillion will come to fruition. Both outcomes should support investment-grade credit valuations.

We also expect new issue supply to decline significantly during the fourth quarter as companies have issued record amounts of debt during the first three quarters. Less supply, improving fundamentals, ongoing support from the Federal Reserve, and progress toward a vaccine should provide support for the investment-grade market. We continue to overweight credit in client portfolios as the sector provides desperately needed yield in today’s environment. As always, sector selection and diligence in credit selection remain of paramount importance.

Sources: FactSet, Bloomberg. Investing involves risks and you may incur a profit or a loss. Past performance cannot guarantee future results. Indices are not available for direct investment.

a s o f s e p t e m b e r 3 0 , 2 0 2 0

Month YTD Trailing 12-month return

Barclays U.S. Aggregate Bond Index -0.05% 6.79% 6.98%

Barclays U.S. Investment Grade Credit Index -0.27% 6.39% 7.50%

Barclays Ba High Yield Index -1.42% 4.24% 6.79%

Barclays U.S. Mortgage Backed Securities Index -0.11% 3.62% 4.36%

Taxable Fixed Incomea s s e t c l a s s o v e r v i e w

Randy Vogel, CFA Director of Taxable Research and Senior Portfolio Manager


Investment PositioningPortfolio targets effective October 1, 2020, for institutional clients with Private Hedge Funds

Growth & IncomeStrategic

Asset Allocation (long term)

Tactical Asset Allocation

(short term)

EquitiesU.S. Large-Cap 27.5% Underweight

U.S. Small-Cap 5.5% Neutral

International Developed 15.8% Neutral

Emerging Markets 5.5% Underweight

Fixed IncomeU.S. Investment Grade–Taxable 24.2% Overweight

High-Yield–Taxable 3.0% Underweight

Real Assets

U.S. Inflation-Linked Bonds 1.0% Underweight

Global REITs 1.5% Neutral

Other 1.5% Overweight

Private Hedge Funds 12.5% Overweight

Cash & Equivalents 2.0% Neutral

Total 100.0%

Note: Totals may differ slightly from the allocation building blocks due to rounding.

TAA, or Tactical Asset Allocation, represents our current recommendation for each model strategy.

SAA, or Strategic Asset Allocation, represents our current benchmark allocation for each model strategy.

This material is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. Allocations presume a long-term investment horizon. Wilmington Trust’s 2020 Capital Markets Forecast is available on www.WilmingtonTrust.com/cmf or upon request from your Investment Advisor. There is no assurance that any investment strategy will be successful. Investing involves risks and you may incur a profit or a loss.

For an overview of our asset allocation strategies, please see the disclosures.

Source: WTIA.


Disclosures

Continued

Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation including, but not limited to, Manufacturers & Traders Trust Company (M&T Bank), Wilmington Trust Company (WTC) operating in Delaware only, Wilmington Trust, N.A. (WTNA), Wilmington Trust Investment Advisors, Inc. (WTIA), Wilmington Funds Management Corporation (WFMC), and Wilmington Trust Investment Management, LLC (WTIM). Such services include trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through M&T Bank Corporation’s international subsidiaries. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC.

Wilmington Trust Investment Advisors, Inc., a subsidiary of M&T Bank, is an SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T affiliates and clients. Registration with the SEC does not imply any level of skill or training. Additional Information about WTIA is also available on the SEC’s website at https://adviserinfo.sec.gov/.

Brokerage services, mutual funds services and other securities are offered by M&T Securities, Inc., a registered broker/dealer, wholly owned subsidiary of M&T Bank, and member of the FINRA and SIPC. Wilmington Funds are entities separate and apart from Wilmington Trust, M&T Bank, and M&T Securities.

These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.

The information in Institutional Perspectives has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product

or service or as a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.

Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested.

Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds.

Alternative assets, such as strategies that invest in hedge funds, can present greater risk and are not suitable for all investors.

Any positioning information provided does not include all positions that were taken in client accounts and may not be representative of current positioning. It should not be assumed that the positions described are or will be profitable or that positions taken in the future will be profitable or will equal the performance of those described.

Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that will reduce returns.

An overview of our asset allocation strategies: Wilmington Trust offers seven asset allocation models for taxable (high-net-worth) and tax-exempt (institutional) investors across five strategies reflecting a range of investment objectives and risk tolerances: Aggressive, Growth, Growth & Income, Income & Growth, and Conservative. The seven models are High-Net-Worth (HNW), HNW with Liquid Alternatives, HNW with Private Markets, HNW Tax Advantaged, Institutional, Institutional with Hedge LP, and Institutional with Private Markets. As the names imply, the strategies vary with the type and degree of exposure to hedge strategies and private market exposure, as well as with the focus on taxable or tax-exempt income.

Model Strategies may include exposure to the following asset classes: U.S. large-capitalization stocks, U.S. small-cap stocks, developed international stocks, emerging market stocks, U.S. and international real asset securities (including inflation-linked bonds and commodity-related and real estate-related securities), U.S. and international investment-grade bonds (corporate for Institutional or Tax Advantaged, municipal for other HNW), U.S. and international speculative grade (high-yield) corporate bonds and floating-rate notes, emerging markets debt, and cash equivalents. Model Strategies employing nontraditional hedge and private market investments will, naturally, carry those exposures as well. Each asset class carries a distinct set of risks, which should be reviewed and understood prior to investing.

Allocations: Each strategy is constructed with target weights for each asset class. Wilmington Trust periodically adjusts the target allocations and may shift away from the target allocations within certain ranges. Such tactical adjustments to allocations typically are considered on a monthly basis in response to market conditions. The asset classes and their current proxies are: large–cap U.S. stocks: Russell 1000® Index; small–cap U.S. stocks: Russell 2000® Index; developed international stocks: MSCI EAFE® (Net) Index; emerging market stocks: MSCI Emerging Markets Index; U.S. inflation-linked bonds: Bloomberg/Barclays US Government ILB Index; international inflation-linked bonds: Bloomberg/Barclays World exUS ILB (Hedged) Index; commodity-related securities: Bloomberg Commodity Index; U.S. REITs: S&P US REIT Index; international REITs: Dow Jones Global exUS Select RESI Index; private markets: S&P Listed Private Equity Index; hedge funds: HFRI Fund of Funds Composite Index; U.S. taxable, investment-grade bonds: Bloomberg/Barclays U.S. Aggregate Index; U.S. high-yield corporate bonds: Bloomberg/Barclays U.S. Corporate High Yield Index; U.S. municipal, investment-grade bonds: S&P Municipal Bond Index; U.S. municipal high-yield bonds: Bloomberg/Barclays 60% High Yield Municipal Bond Index / 40% Municipal Bond Index; international taxable, investment-grade bonds: Bloomberg/Barclays Global Aggregate exUS; emerging bond markets: Bloomberg/Barclays EM USD Aggregate; and cash equivalents: 30-day U.S. Treasury bill rate.


Disclosures Continued

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All investments carry some degree of risk. Return volatility, as measured by standard deviation, of asset classes is often used as a proxy for illustrating risk. Volatility serves as a collective, quantitative estimate of risks present to varying degrees in the respective asset classes (e.g., liquidity, credit, and default risks). Certain types of risk may be underrepresented by this measure. Investors should develop a thorough understanding of the risks of any investment prior to committing funds.

Quality ratings are used to evaluate the likelihood of default by a bond issuer. Independent rating agencies, such as Moody’s Investors Service and Standard & Poors, analyze the financial strength of each bond’s issuer. Ratings range from Aaa or AAA (highest quality) to C or D (lowest quality). Bonds rated Baa3 or BBB and better are considered Investment Grade. Bonds rated Ba1 or BB and below are Speculative Grade (also High Yield.)

Definitions: Alpha is a measure of performance on a risk-adjusted basis. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.

Equity risk premium is the extra return that’s available to equity investors above the return they could get by investing in a riskless investment like T-Bills or T-Bonds or cash.

Event-driven hedge fund strategies attempt to take advantage of temporary stock mispricing before or after a corporate event takes place. An event-driven strategy exploits the tendency of a company’s stock price to suffer during a period of change.

HFR® (HedgeFundResearch) Indices are the established global leader in the indexation, analysis and research of the hedge fund industry.

LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another.

Macro hedge fund strategies generally focus on financial instruments that are broad in scope and move based on systemic or market risk (not security specific). In general, portfolio managers who trade within the context of macro strategies focus on currency strategies, interest rates strategies, and stock index strategies.

Relative value hedge fund strategies cover a variety of low-volatility trading strategies with the consistent theme of attempting to reduce market risk, i.e., the manager seeks to generate a profit regardless of which direction the markets are moving. All relative value strategies minimize market risk by taking offsetting long and short positions in related stocks, bonds, and other types of securities.

S&P 500 index measures the stock performance of 500 large companies listed on stock exchanges in the U.S. and is one of the most commonly followed equity indices.

Limitations on use:This publication is intended to provide general information only and is not intended to provide specific investment, legal, tax, or accounting advice for any individual. Although information contained herein was prepared from sources believed to be reliable, Before acting on any information included in this publication you should consult with your professional advisor or attorney.

Third-party trademarks and brands are the property of their respective owners.

Institutional Perspectives - Wilmington Trust...Institutional Perspectives July • August 2020...

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